Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note 15. Commitments and Contingencies

Loan commitments are made to accommodate the financial needs of the Bank’s customers. The Bank offers commercial, mortgage, and consumer credit products to their customers in the normal course of business, which are detailed in Note 4. These products represent a diversified credit portfolio and are generally issued to borrowers within the Bank’s branch office systems in eastern Pennsylvania. The ability of the customers to repay their credit is, to some extent, dependent upon the economy in the Bank’s market areas. Collateral is obtained based on management’s credit assessment of the customer.

Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They primarily are issued to support commercial paper, medium and long-term notes and debentures, including industrial revenue obligations. The approximate term is usually one year but some can be up to five years. Historically, substantially all standby letters of credit expire unfunded. If funded the majority of the letters of credit carry current market interest rates if converted to loans. Because letters of credit are generally un-assignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The carrying amount is recorded as unamortized deferred fees and the reserve for credit risk. As of December 31, 2011, the maximum potential amount of future payments under letters of credit is $47.8 million. The current carrying amount of the contingent obligation is $238 thousand.

This arrangement has credit risk essentially the same as that involved in extending loans to customers and is subject to the Bank’s normal credit policies. Collateral is obtained based on management’s credit assessment of the customer.

The Bank also controls their credit risk by limiting the amount of credit to any business, institution, or individual. Management evaluates the creditworthiness of the institution on at least a quarterly basis in an effort to monitor its credit risk associated with this concentration.

The Bank significantly grew its mortgage-banking business during 2011 and due to this growth increased its potential to have to repurchase the mortgages due to errors in documentation and underwriting. The Bank maintains a reserve in other liabilities for estimated losses associated with sold mortgages that may be repurchased. At December 31, 2011, the reserve for sold mortgages was $112 thousand.

The Corporation periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Corporation will reimburse a portion of the loss borne by the financial institution. The third parties usually have other borrowing relationships with the Corporation. The Corporation monitors overall borrower collateral and performance, and at the end of December 31, 2011, believes sufficient collateral is available to cover potential swap losses. The Corporation pledges cash or securities to cover a portion of the negative fair value of the RPAs, as measured by the participant financial institution. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 13 years. At December 31, 2011, the notional amount of the RPAs was $24.2 million, with a negative fair value of $2.3 million, of which $1.5 million was pledged to the participant financial institutions as collateral. The maximum potential future payment guaranteed by the Corporation cannot be readily estimated, but is dependent upon the fair value of the interest rate swaps at the time of default. If an event of default on all contracts had occurred at December 31, 2011, the Corporation would have been required to make payments of approximately $2.3 million.

Based on consultation with the Corporation’s legal counsel, management is not aware of any litigation that would have a material adverse effect on the Corporation’s consolidated balance sheet or statement of income. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.

The following schedule summarizes the Corporation’s off-balance sheet financial instruments:

	Contract/Notional
(Dollars in thousands)	Amount
Financial instruments representing credit risk:
Commitments to extend credit	$	473,789
Performance letters of credit		15,020
Financial standby letters of credit		31,552
Other letters of credit		1,214

As of December 31, 2011, the Corporation and its subsidiaries were obligated under non-cancelable leases for various premises and equipment. A summary of the future minimum rental commitments under non-cancelable operating leases net of related sublease revenue is as follows:

(Dollars in thousands)	Amount
Year
2012	$	2,086
2013		1,969
2014		1,968
2015		1,831
2016		1,724
Thereafter		18,734
Total	$	28,312

Rental expense charged to operations was $2.2 million, $2.0 million and $1.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.